Will Security Token Offerings (STOs) eclipse ICOs success?
Panic, panic, panic.
A single word that dictated the state of Crypto affairs in 2018.
The market has dropped to 100 Billion mark. Most people are calling it quits and declaring Crypto dead. For many projects, that proclamation of death is true. They may not survive this liquidity crisis. For those that whether this bear winter, SEC may greet them on the other side with hefty fines, or worse.
One of the reasons SEC is going after projects that raised money using ICOs is because of the securities laws. Instead of trying to circumvent these laws – what if the crypto market embraces the securities laws?
That is the thought behind Security Token Offerings (STOs).
Most businesses are staying away from raising money using ICO model, in spite of it being easy and inexpensive, because of the headaches from Securities board. However, if you find a way to be compliant with regulatory requirements and issue securities using the ICO model, it will bring a lot of legitimate businesses and investors to this space.
Difference between the traditional stock market and Security Tokens
The existing capital market is very restrictive.
You have to be a millionaire or a venture capitalist to get on the ground floor of an exciting opportunity. The common man has no shot at getting in on the action during early stages. Raising capital through traditional capital markets is very expensive. PwC’s report indicates that the costs can easily run into millions.
Below table summarizes big differences between traditional capital market and security tokens.
Difference between Security Token Offerings (STOs) and the traditional capital market
|Micro-investments possible||Restricted to Accredited Investors and Venture Capitalists|
|Very inexpensive to offer Security Tokens||Costs could run into millions|
|Online management of Investor communication and share registry possible||Maintaining ownership records is pretty outdated and expensive|
|Automated dividends distribution is possible||Sophisticated third-party vendors required to manage dividends distribution|
|Numerous customization options based on the need||Pretty restrictive|
|Open to worldwide markets||
Geography restrictions apply
Security Token Offerings are a perfect intersection of Cryptos and traditional stock markets
Existing methods of raising capital are very restrictive as to who can access it and what they can offer. However, security markets have gone through a lot of trials and errors and hard lessons to build investor protection protocols.
Cryptos were made accessible to everyone irrespective of economic stature, however, when investors got scammed, there was no good recourse to recover the funds.
Security Tokens have the potential to be accessible to everyone, help tokenize anything of value while addressing the investor protection concerns by adhering to the Securities laws.
STOs will bring legitimacy to the crypto space
Right now, people who have invested in ICOs have no claim of ownership. They are purely speculating on the ‘hope’ of increase in demand and value of the tokens they bought in.
Security tokens will be different, in that, they will offer ownership rights in the company, power to vote, participate in decisions of the company, receive dividends and sell their shares to someone else who will then have similar rights.
Bragging rights of ICOs for raising billions of dollars will look like a joke once STOs go full throttle. Some industry experts expect STOs to be a multi-trillion-dollar industry. Dan Tapscott, the author of Blockchain Revolution, says “likely to explode in value, are security tokens, Cryptoassets that represent financial assets, such as stocks, bonds, and future contracts.”
Big guys are creating platforms to enable STO exchanges
Companies like Fidelity that manage investments in the Trillions will hesitate to put any money through existing crypto exchanges, however, if an enterprise-grade solution is offered by tZero or Coinbase – they will definitely look into them. Remember, Fidelity and other investment institutions have to offer new investment vehicles on their platforms since Millennials are shying away from stocks and traditional investments.
It is imperative for these giants to welcome new investment class to continue to be relevant in a decade or two from now. Getting reliable platforms to this space will help the old timers make the leap.
STOs just might make up for what Cryptos lacked
What lacked in crypto space was a mainstream platform that looked, felt and operated the way securities and traditional trading platforms did.
People have a hard time understanding how something that is created by a computer code could have any value. And how someone can assign a value to something that is not backed up by an asset or ownership rights.
That is where Security Tokens are going to be different.
They are going to offer ownership, voting, asset allocation, or other rights (all or few or selected, however it is designed) to the investors. Now investors will have the incentive to buy a security token. The advantage to the companies is that they will have access to capital from micro investors as well – they don’t have to impress someone from Wall Street or Venture Capital firm, they just have to impress a common joe that wants to put in his/her spare change into an idea.
Projects are lining up to cater STO market
Polymath promised a lot to this space, we are yet to see anything concrete from them. WeOwn has already built an app that is ready to use including their share registry. At the time of this writing, PrefLogic is working its way around securities laws to become a legitimate STO platform in the United States market.
While tZero, Coinbase and eventually NASDAQ may provide a place to trade security tokens on their platforms, the projects mentioned above are the ones that are going to act as a bridge between investors and ideas.
What can we expect in 2019 and forward?
During the first half of 2019, we will see companies like tZero and Coinbase offer platforms that will enable trading Security Tokens. These Security Token platforms will not only cater to new STOs but also existing crypto projects that will be forced to adhere to securities laws.
Once Bitcoin smart contracts are enabled using RSK protocol, we might even see STOs launched on Bitcoin blockchain.
There will be a transition of sorts in the second half of 2019 where more and more big brand names will seek STOs to raise capital. Once mainstream businesses realize how inexpensive and easy it is to raise capital using STO platforms – they will start flocking to this platform eventually, probably not in 2019. This will just be the beginning. Once this model becomes mainstream – we will witness trade volumes move from Millions to Billions into Trillions in the space. And most of that money will be made up of spare change from common folks.
Thank you for reading this article.
Subscribe to be notified for new updates in Crypto and Free eBooks!
Subscribers get our upcoming copy of ‘STAYING RELEVANT’, an essential primer from Cryptotapas for FREE!
Buy us a : Keep information FREE. We do not sell what we research. A small tip from you can help us bring you more content like this for FREE.
If you are thinking to open KuCoinaccount, please consider using our referral link.
Everything in this article is an opinion, not an advice of any kind. This material has been prepared for general informational purposes only and it is not intended to be relied upon as accounting, tax, investment, legal or other professional advice. Please consult with a professional for specific advice.
CryptoTapas does not endorse or guarantee the accuracy of the information and claims made in respective publications referenced in this database.
About the author
RK Reddy holds two Masters degrees, one in Accounting and another in Business Administration with over 15 years of experience in the financial services industry.
RK Reddy is an ardent fan of Blockchain and Cryptocurrencies. You can see the excitement about this new technology in every article on Cryptotapas.com. Sometimes this excitement leads to an overly optimistic view. Guilty as charged. RK Reddy says “what may seem like an ‘overly optimistic expectation’ today may become an everyday norm in 5-10 years; look at the history of cars or airplanes, Blockchain and Cryptocurrencies belong to a similar frame of reference.” Of course, that is just his opinion.